Gold & Silver Trading Alert: Silver’s Meaningful Signal

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Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

Gold moved a bit higher yesterday while miners were basically flat, but silver moved significantly higher – is silver leading the precious metals sector higher?

In short, that’s unlikely and the mentioned performance is actually a bearish sign. Silver is known to rally quite suddenly outperforming gold right before major declines. The miners’ underperformance simply confirms the above.

Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved a bit higher and the volume was visibly lower than what we saw in previous days’ downswings. Moreover, please note that the sell signal from the Stochastic indicator was not invalidated. Consequently, it seems that yesterday’s move was just a correction – nothing more.

Short-term Silver price chart - Silver spot price

As mentioned earlier, silver moved visibly higher, but that’s something we saw quite often right before big declines, for instance in late October 2015 or mid-August 2015. Silver is known (at least by those who have been following it for a longer time) for its fake moves, so it’s important to consider confirmations and other signals before making an investment or trading decision based on what happens in silver.

SIL - Long-term Global X Silver Miners

At this time not even silver stocks confirm silver’s move. The former had broken below the previous lows and didn’t move back above them yesterday despite silver’s move higher. This is a bearish sign.

GDX - Market Vectors Gold Miners - Gold mining stocks

We say the same about the mining stocks’ performance in general. Gold moved a bit higher, silver moved more visibly higher and miners didn’t rally – in fact GDX closed unchanged. All in all, miners simply paused yesterday and the outlook remains bearish. Once miners break below the rising support line, they are likely to quickly move to their 2015 low and then quite likely break below this level without an additional important consolidation.

Summing up, silver’s yesterday’s performance may seem positive, but based on the way similar situations developed in the past, we actually view the white metal’s unconfirmed rally as something bearish – especially given the very weak performance of mining stocks.

The outlook remains bearish and the full short positions appear to be justified from the risk / reward point of view, even though we could still see a few days of strength before the decline resumes. It seems likely that profits from this trade will at least match the current profits in oil and likely exceed the recent profits in stocks.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:

Gold: initial target price: $973; stop-loss: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61

In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

GDXJ ETF: initial target price: $15.23; stop-loss: $21.13
JDST ETF: initial target price: $52.99; stop-loss: $21.59

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.

The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

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